# Homework 4 solutions

Chapter 4 Understanding Money and Its Management

Nominal and Effective Interest Rates

4.1
x Nominal interest rate:

1.15% 12 13.8% r u

x Effective annual interest rate:

12
(1 0.0115) 1 14.71%
a
i

4.2
(a) Monthly interest rate: 13.9% 12 1.1583% i y
Annual effective rate:
12
(1 0.01158) 1 14.82%
a
i

(b)
2
\$3, 000(1 0.01158) \$3, 069.90

4.3 Assuming weekly compounding:

52
6.89%
0.0689
(1 ) 1 0.07128
52
a
r
i

4.4
x Interest rate per week

Given : \$500, 40, 16 weeks P A N

\$500 \$40( / , ,16)
3.06% per week
P A i
i

x Nominal annual interest rate:

% 12 . 159 52 % 06 . 3 u r

x Effective annual interest rate:

52
(1 3.06%) 1 379.39%
a
i
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Page | 3

4.10 No. The debt interest rates are higher than the return on the investment funds.
Pay down the highest-interest debt, which is the charge account debt.

4.11 Bank A:
365
0.07
1 1 7.25%
365
a
i
§ ·

¨ ¸

Bank B:
0.069
1 7.14%
a
i e
The difference between two banks after 2 years:
> @ \$3, 000 ( / , 7.25%, 2) ( / , 7.14%, 2) \$6.85 F P F P

Compounding More Frequent than Annually

4.12

F Pe
rN
\$5,000e
(0.06u10)

= \$9,110.59

4.13

P Fe
rN
\$5,000e
(0.06u5)

= \$3,704.09

4.14

F Pe
rN
\$3,000e
(0.08u5)

= \$4,475.47

4.15
0.06
2
N
P Pe
ln 2 0.06N
11.55 years N

4.16
(a) Nominal interest rate:

1.95% 12 23.4% r u

(b) Effective annual interest rate:

12
(1 0.0195) 1 26.08%
e
i

(c)
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Page | 4

3 (1 0.0195)
log3 log1.0195
56.89 months
N
P P
N
N

ଃ 56.89 / 12 = 4.75 years

(d)
0.0195
3
ln(3) 0.0195
56.34 months
N
e
N
N

ଃ 56.34 / 12 = 4.69 years
4.17
8
0.08
\$15, 000(1 ) \$17, 575
4
F

4.18
365
0.06
(1 ) 1 6.183%
365
a
i

6
\$15, 000( / , 6.183%,12) \$15, 000( / , %,12 365)
365
F F P F P u
= \$ 30,815

4.19
(a)
20
0.09
\$7,890(1 ) \$19, 028.42
2
F

(b)
60
0.08
\$4, 500(1 ) \$14, 764.64
4
F

(c)
84
0.12
\$29, 800(1 ) \$68, 740.34
12
F

4.20
(a) Quarterly interest rate = 1.5%

3 (1 0.015)
log3 log1.015
73.78 quarters
N
P P
N
N

ଃ 73.78 / 4 = 18.5 years

(b) Monthly interest rate = 0.5%

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Page | 5

3 (1 0.005)
log3 log1.005
220.27 months
N
P P
N
N

ଃ 220.27 / 12 = 18.42 years

(c)
0.06
3
ln(3) 0.06
18.31 years
N
e
N
N

4.21
(a) Quarterly effective interest rate = 2.25%

\$8, 000( / , 2.25%, 60) \$261, 992 P P A

(b) Quarterly effective interest rate = 2.2669%

\$8, 000( / , 2.2669%, 60) \$260, 955 P P A

(c) Quarterly effective interest rate = 2.2755%

\$8, 000( / , 2.2755%, 60) \$260, 430 P P A

4.22
( / , , 20) \$5, 000( / , 2.02%, 20) \$121, 729 F A F A i F A

4.23
(a) Quarterly effective interest rate = 2.25%

F \$4,000( F / A, 2.25%, 40) \$255,145

(b) Quarterly effective interest rate = 2.2669%

F \$4,000(F / A, 2.2669%, 40) \$256,093

(c) Quarterly effective interest rate = 2.2755%

F \$4,000(F / A, 2.2755%, 40) \$256,577

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Page | 6

4.24 (d)

4.25
0.079/ 4
1 1.9946%
a
i e
\$10, 000( / ,1.9946%, 20) A A P
= \$ 611.25

4.26
(a) Monthly effective interest rate = 0.74444%

\$1, 500( / , 0.74444%, 96) \$209,170 F F A

(b) Monthly effective interest rate = 0.75%

\$1, 500( / , 0.75%, 96) \$209, 784 F F A

(c) Monthly effective interest rate = 0.75282%

\$1, 500( / , 0.75282%, 96) \$210, 097 F F A

4.27 (b)

0 1 2 3 4 5 6 7 8 9 10 11 12
\$1,000
Effective interest rate per
payment period

i = (1 + 0.01)
3
– 1
= 3.03%
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Page | 12

Then, compute the total present worth of the energy cost savings over 5 years.

P \$246.85 \$246.85( P / F,0.5%,12) \$246.85(P / F,0.5%, 24)
\$246.85(P / F,0.5%,36) \$246.85( P / F,0.5%, 48)
\$1,098.97

Continuous Payments with Continuous Compounding

4.51 Given

i 10%, N 10years, and A \$95,000 u 365 \$34,675,000

x Daily payment with daily compounding:

P \$95,000( P / A,
10%
365
,3650) \$219,170,331.48
x Continuous payment and continuous compounding:

P Ae
rt
dt
0
10
³
\$34,675,000
e
(0.10)(10)
1
0.1e
(0.10)(10)
ª
¬
«
º
¼
»
\$219,187,803.77

ଃ The difference between the two compounding schemes is only \$17,472.27

4.52 Given ! 11%, " 3, #
0
\$500, 000, #
"
\$40, 000, and 0 d \$ d 3,

) (t f
\$500,000
\$40,000
0 1 2 3
t
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Page | 14

42 . 875 , 8 \$
) 8 %, 5 . 1 , / )( 8 %, 5 . 2 , / )( 4 %, 2 , / ( 000 , 2 \$
) 8 %, 5 . 1 , / )( 8 %, 5 . 2 , / ( 000 , 2 \$ ) 8 %, 5 . 1 , / )( 4 %, 5 . 2 , / ( 000 , 3 \$
) 8 %, 5 . 1 , / ( 000 , 2 \$ ) 4 %, 5 . 1 , / ( 000 , 2 \$

F P F P F P
F P F P F P F P
F P F P P

(b) Find F:

186 , 13 \$
) 4 %, 2 , / )( 8 %, 5 . 2 , / )( 8 %, 5 . 1 , / (

P F P F P F P F

(c) Find A, starting at 1 and ending at 5:

! " "(! / #, 2%, 4) "(! / #, 2.5%, 4)(! / #, 2%, 4)
"(! / #, 2.5%, 8)(! / #, 2%, 4) "(! / #,1.5%, 4)(! / #, 2.5%, 8)(! / #, 2%, 4)
5.9958"
"
\$13,186
5.9958
\$2,199.21

4.57
(a)
26 . 305 , 1 \$
) 12 %, 5 . 0 , / )( 24 %, 75 . 0 , / )( 12 %, 5 . 0 , / ( 500 \$
) 12 %, 5 . 0 , / )( 24 %, 75 . 0 , / ( 500 \$
) 12 %, 5 . 0 , / )( 12 %, 75 . 0 , / ( 300 \$ ) 12 %, 5 . 0 , / ( 300 \$

F P F P F P
F P F P
F P F P F P P

(b)
\$1, 305.26 \$300( / , , 2) \$500( / , , 2)( / , , 2)
7.818% per year
P A i P A i P F i
i

4.58 Since payments occur annually, you may compute the effective annual interest
rate for each year.

% 416 . 9 1 )
365
09 . 0
1 (
365
1
i , % 417 . 9 1
09 . 0
2
e i

\$400( / , 9.416%, 2)( / , 9.417%, 2) \$250( / , 9.416%,1)( / , 9.417%, 2)
\$100( / , 9.417%, 2) \$100( / , 9.417%,1) \$250
\$1, 379.93
F F P F P F P F P
F P F P

4.59
0.06 0.08
1 2
1 6.18%, 1 8.33% i e i e
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Page | 15

0.06 0.08
\$1, 000
\$1, 000( / , 6.18%,1)( / , 8.33%,1)
\$1,150.25
F e e
F P F P

Amortized Loans

4.60 Loan repayment schedule for the first 6 months:

End of
month Interest Payment
Principal
Payment
Remaining
Balance
0 \$0.00 \$0.00 \$25,000.00
1 \$125.00 \$358.32 \$24,641.68
2 \$123.21 \$360.11 \$24,281.57
3 \$121.41 \$361.91 \$23,919.66
4 \$119.60 \$363.72 \$23,555.93
5 \$117.78 \$365.54 \$23,190.39
6 \$115.95 \$367.37 \$22,823.03

4.61
(a)
(i) ) 24 %, 75 . 0 , / ( 000 , 10 \$ P A
(b)
(iii) ) 12 %, 75 . 0 , / (
12
A P A B

4.62 Given information:

9.45%/ 365 0.0259% per day i , N = 36 months.

x Effective monthly interest rate, i = (1 0.000259)
30
1 0.78% per month

x Monthly payment, A = \$13,000( A/ P,0.78%,36) \$415.58per month

x Total interest payment, I = \$415.58 36 \$13, 000 \$1, 960.88 u

4.63

(a) Using the bank loan at 9.2% compound monthly
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Page | 19

x Monthly repayment:

046 , 1 \$ ) 360 %, 75 . 0 , / ( 000 , 130 \$ P A A

x Effective interest rate on this loan

\$126,100 \$1, 046( / , , 360)
0.7787% per month
P A i
i

12
(1 0.007787) 1 9.755% per year
a
i

4.73
(a)

\$50,000 \$7,500(P / A, i,5) \$2,500(P / G, i,5)
i 6.914%

(b)
P = \$50,000
Total payments = \$7,500 + \$10,000 + ˎ + \$17,500GdG\$62,500
Interest payments = \$3,456.87 + ˎGRG\$1,131.66GdG\$12,500

End of month Interest Payment
Principal
Payment
Remaining
Balance
0 \$0.00 \$0.00 \$50,000.00
1 \$3,456.87 \$4,043.13 \$45,956.87
2 \$3,177.34 \$6,822.66 \$39,134.21
3 \$2,705.64 \$9,794.36 \$29,339.85
4 \$2,028.48 \$12,971.52 \$16,368.34
5 \$1,131.66 \$16,368.34 \$0

4.74 Given Data: r = 7% compounded daily, N = 360 years

x The effective annual interest rate is

% 25 . 7 1 ) 365 / 07 . 0 1 (
365

a
i

x Total amount accumulated at the end of 25 years

\$75, 000 u 5% \$3, 750

! \$3, 750(! / ", 7.25%, 25) \$150(! / #, 7.25%, 25)
\$3, 750(! / ", 7.25%, 25) \$150(\$ / #, 7.25%, 25)(! / \$, 7.25%, 25)
\$329, 799.78

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Page | 21

4.77
(a)
\$3, 000 \$156.04( / , , 24)
1.85613% per month
1.85613% 12 22.2735%
P A i
i
r

u

(b)
85 . 664 , 1 \$ ) 12 %, 85613 . 1 , / ( 04 . 156 \$ A P P

4.78
\$5, 025 \$146.35( / , , 48)
1.46% per month
\$146.35( / ,1.46%, 33) 3,810.91
P A i
i
P P A

Loans with Variable Interest Rates

4.79
(a) Amount of dealer financing = \$15,458(0.90) = \$13,912

! \$13, 912(! / ",11.5%/ 12, 60) \$305.96

(b) Assuming that the remaining balance will be financed over 56 months,

#
4
\$305.96(" / !,11.5%/ 12, 56) \$13, 211.54
! \$13, 211.54(! / ",10.5%/ 12, 56) \$299.43

(c) Interest payments to the dealer:

I
dealer
\$305.96 u 4 \$13, 211.54 \$13,912 \$523.38

Interest payments to the credit union:

union
\$299.43 56 \$13, 211.54 \$3, 556.54 I u

4.80 Given: purchase price = \$155,000, down payment = \$25,000

x Option 1: 7.5%/12 0.625% per month i , N = 360 months

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Page | 21

4.77
(a)
\$3, 000 \$156.04( / , , 24)
1.85613% per month
1.85613% 12 22.2735%
P A i
i
r

u

(b)
85 . 664 , 1 \$ ) 12 %, 85613 . 1 , / ( 04 . 156 \$ A P P

4.78
\$5, 025 \$146.35( / , , 48)
1.46% per month
\$146.35( / ,1.46%, 33) 3,810.91
P A i
i
P P A

Loans with Variable Interest Rates

4.79
(a) Amount of dealer financing = \$15,458(0.90) = \$13,912

! \$13, 912(! / ",11.5%/ 12, 60) \$305.96

(b) Assuming that the remaining balance will be financed over 56 months,

#
4
\$305.96(" / !,11.5%/ 12, 56) \$13, 211.54
! \$13, 211.54(! / ",10.5%/ 12, 56) \$299.43

(c) Interest payments to the dealer:

I
dealer
\$305.96 u 4 \$13, 211.54 \$13,912 \$523.38

Interest payments to the credit union:

union
\$299.43 56 \$13, 211.54 \$3, 556.54 I u

4.80 Given: purchase price = \$155,000, down payment = \$25,000

x Option 1: 7.5%/12 0.625% per month i , N = 360 months

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Page | 22

x Option 2: For the assumed mortgage,
1
\$97, 218 P ,

i
1
5.5%/ 12 0.458% per month ,
1
300 months N ,
1
\$597 per month A ;
For the 2
nd
mortgage 782 , 32 \$
2
P ,
2
9%/12 0.75% per month i ,
2
120 months N

(a) For the second mortgage, the monthly payment will be

!
2
"
2
(! / ", #
2
, \$
2
) \$32, 782(! / ", 0.75%,120) \$415.27

\$130, 000 \$597( / , , 300) \$415.27( / , ,120)
0.5005% per month
0.5005% 12 6.006% per year
6.1741%
a
P A i P A i
i
r
i

u

(b) Monthly payment

x Option 1: 97 . 908 \$ ) 360 %, 625 . 0 , / ( 000 , 130 \$ P A A

x Option 2: \$1,012.27 (= \$597 + \$415.27) for 120 months, then \$597 for
remaining 180 months.

(c) Total interest payment

x Option 1: % \$908.97 u 360 \$130, 000 \$197, 229.20
x Option 2: 4 . 932 , 98 \$ 000 , 130 \$ 4 . 932 , 228 \$ I

(d) Equivalent interest rate:

\$908.97( / , , 360) \$597( / , , 300) \$415.27( / , ,120)
1.2016% per month
1.2016% 12 14.419% per year
15.4114%
a
P A i P A i P A i
i
r
i

u

Loans with Variable Payments

4.81
\$10, 000 ( / , 0.6667%,12) ( / , 0.75%,12)( / , 0.6667%,12)
22.05435
A P A A P A P F
A

ଃ 43 . 453 \$ A

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8